Retail Might Soar In 2023 – If Republicans Change Biden Trade Policies

Retailers generally accept the hand they are dealt, but some are (perhaps) feeling victimized by current trade policies. It is true that many of these trade policies were carried forward from prior administrations, but it is also true that trade renewals and adjustments were sandbagged by the recently termed-out 117^th Congress – and not aggressively confronted by Team Biden. The constant stream of USA trade inactivity continues to thwart retail growth, and exacerbates efforts to reduce retail inflation. If the newly seated House Republicans are willing to use their new-found power to address critical trade issues – retail could easily soar in 2023.

To cite a relatable example of just one of the many issues affecting the retail community (called Section 321 de minimis), it is helpful to look back to late in the month of March of 2016 – when a USA garment center employee was in his Hong Kong hotel room – doing what his New York office told him to do. The new employee was preparing to hand carry the new Holiday 2016 fashion line back to New York City and was instructed to cut a hole (bigger than a silver dollar) in each garment – or to indelibly write the word “SAMPLE” with letters that would span at least 1 inch high by 2 inches wide. This purpose of this exercise was to comply with a garment status clarification in order to clear and comply with U.S. customs – free of any duty or tax – so the garments would be determined as “unsuitable for sale.”

In Hong Kong, the employee rose early, took the red & gray taxi to the airport, and eventually boarded a plane headed New York City. The company’s Holiday fashion line was now carefully mutilated and stored safely in the cargo bay of the aircraft.

Around the same time, also in March of 2016, two senior citizens disembarked from a 5-day luxury Caribbean cruise at the port of Miami – with three large suitcases. Preparing to return from their trip, the couple expressed concern that they would need to pay a duty or tax on the many gift items that they had purchased for their grandchildren during the short trip.

When the garment center employee landed at JFK airport, he lined up for the customs agent and, much to his surprise, the agent waived him through – not really concerned about the carefully mutilated garments.

In Miami, the U.S. customs agent at the sea-port briefly stopped the elderly couple and gently inquired about the need for three suitcases – since only two people were on the short five-day cruise. The seniors indicated that they had purchased gifts for their grandchildren and the gifts were in the third suitcase. Much to the surprise of the seniors, the customs agent smiled and said that they were in luck – because as of March 16, 2016 the Obama Administration had raised the import limit on goods coming into the country from $200 per person per day – to $800 per person per day – free of duty and tax. The seniors were allowed $1,600 of merchandise to bring into the country free of duty on that day.

While the two import stories above are somewhat fictionalized, the enhanced reality (to enterprising retailers) became strikingly clear. In a serious attempt to alleviate the paperwork burden for occasional goods entering the country (via the implementation of Custom’s Section 321 de minimis), a new era of importing was born. The adjusted importing law was written as “per-person-per day” which meant that any individual could import every day of the week – to a maximum of $800 per-person per-day. The birth of direct to consumer (D-T-C) was amplified, and helped create a rapid rise of numerous direct-ship exporters – including several popular Chinese fast-fashion companies.

With the advent of COVID and the explosion of at-home shopping, fast-fashion retailers grabbed this idea and ran with it. Why would anyone open a retail store in the USA (brick & mortar), if you could simply display the goods on-line, and then just mail in the purchases direct from the factory in Asia? It suddenly became quite easy to undersell much of the USA based brick & mortar retail competition – especially ones that maintained warehouses, retail stores, sales staff, and also paid duty and faced container inspection for their consolidated cargo.

Today, it is estimated that more than 1.5 million small packages cross the USA border each and every day – free of duty and tariff and customs inspection – with their value declared to be under $800.

American retailers can probably live with (or take advantage) of this situation, but there is suddenly a massive hole in the system. In addition, there is still yet another glitch to deal with.

In the United States, there exists a valuable commodity called a Foreign Trade Zone (FTZ) and there are about 195 of them nationwide. Goods can be shipped into a USA based FTZ and held there until they are needed (at which point they are released and any necessary duty or tax is paid). The glitch is – since the shop-at-home phenomenon was amplified, FTZ’s are NOT allowed to ship direct to the consumer without paying the duty (tax) – which puts them at a competitive disadvantage to shippers outside of USA borders. This specific problem has alarmed builders of new USA warehousing, and many have considered moving their distribution centers to Canada or Mexico (or even shipping direct from China) – in order to remain competitive in the D-T-C USA marketplace – as being tax and inspection free. The 117^th Congress was aware of the problem and had the ability to fix it, but they didn’t and USA warehousing & distribution jobs are being lost. Perhaps the new Republican controlled Congress will take some decisive action to correct this serious issue.

There are many other egregious actions that were also not completed by the last (117^th) Congress. There was also their inability to renew the GSP and MTB programs which had expired at the beginning of their two-year term.

GSP stands for the Generalized System of Preferences – a critically important USA trade tool that the Office of the United States Trade Representative (USTR) says: promotes American values and jobs, promotes growth in the developing world, and helps American companies remain competitive. The bill was originally passed 48 years ago and is valued as the oldest and the largest critical international trade program – until (of course) Congress let the GSP clock run out on Jan 1, 2021. The internal “political” argument for non-renewal of GSP was said to be over Democratic insistence on linking GSP renewal to another bill called Trade Adjustment Assistance (TAA) which provides aid to workers who lose their jobs, or whose wages are affected because of increased imports.

The above mentioned items – de minimis and GSP – are but two of the many serious trade items that Congressional Republicans could get their arms around (if they want to). Unresolved are the Miscellaneous Tariff Bills (MTBs), the early renewal of the African Growth & Opportunity Act (AGOA), the early renewal of Haiti HOPE-HELP, the removal or exclusion of the Trump era tariffs and, of course, the exploration of new trade deals – which has all but ground to a halt – as other countries (like China) have been increasing trade deals.

If Congressional Republicans remain serious about stemming inflation and repairing international commerce – fixing the retail trade issues would be an excellent place to start.

It was the Henry Ford who once said: “You can’t build a reputation on what you are going to do.”

In politics – as in trade – reputation is everything, and it is clear that some aggressive corrective trade action by the newly seated 118^th Congress would be greatly appreciated by retailers and by the American consumer.